Ridge Runner Chronicles – July 12, 2023

By Editor | July 11, 2023 |

Is the wealth tax on our doorstep

By Bill Hoagland
In 2006, Charles and Kathleen Moore, a married couple living in the state of Washington, donated $40,000 toward a project to help others who were less fortunate; they invested in a project in rural India to improve the subsistence of people living there. There was never any expectation that the Moores would receive any monetary benefit from this “investment”. The corporate entity running that project, as it turns out, did well financially but the profits over the years were reinvested in the project rather than being distributed to shareholders.
In 2018, the IRS advised the Moores that they owed an additional $16,000 in taxes for tax year 2017 because the entity running the project had increased its net worth even though none of this value was ever distributed to shareholders. The Moores paid the additional tax and then sued the government to recover what had been paid, claiming that they were being taxed on the increased value of the investment despite the fact they never “realized” any income from that investment. In essence, they claimed this was a “wealth tax” for which there is no authorization in the US Constitution or in the Sixteenth Amendment to the Constitution. (The Sixteenth Amendment, passed in 1913, authorized the imposition of an income tax for the first time.)
In 2022, the Ninth Circuit Court of Appeals affirmed the denial of the Moore’s claim for reimbursement, saying in essence that there is no constitutional requirement that the income being taxed be “realized” before it can be taxed. Really? This would be news to lots of taxpayers, financial planners, and accountants because for years, it has been assumed that the increase in the value of your assets is not subject to income taxes until that asset—whether we are talking about stocks, real estate, gold coins or whatever– is sold and you receive something of value in return.
Requiring that income be “realized” before it can be taxed only makes sense. Let’s look at a hypothetical similar to the Moore’s situation: suppose that we already had a wealth tax in this country and that it was being applied to the assets in your 401(k). If those assets in your 401(k) included stocks in which the corporation had retained earnings that were not distributed and the stock appreciated significantly in value, you might be taxed for your share of those retained earnings or for your share of the appreciated value of the stock even though there was no distribution of the earnings and the stock was never sold. So how are you supposed to pay the tax on these retained earnings and appreciated values? Sure, sell the stock so that you can pay income tax on the income you never received? Isn’t that great?
On June 26, the US Supreme Court agreed to review this case during the October 2023 term (which lasts from October 2023 to June 2024). The basic issue will be whether a wealth tax is permitted under the US Constitution and the Sixteenth Amendment. You may think I am crying “wolf” by writing this column because admittedly, the tax in this case only involves foreign investments, not domestic ones. But now we have legal precedent in the Ninth Circuit that the government can impose a wealth tax. And let’s face it–over the next few years, we are probably going to hear a lot more about why we need “wealth taxes” at both the national and state levels. If the Court is going to clarify the issue of whether a “wealth tax” is constitutional, this is the time to do it.
While polls indicate that most Americans are not opposed to a wealth tax on billionaires, be careful what you wish for. Truth is, there are folks out there right now who think you should be paying a wealth tax too.
Note: I recommend an excellent blog, “www.scotusblog.com” if you want to follow the Moore case as it proceeds in the Supreme Court. The Moore case can now be found on that website in the list of cases coming up for the October 2023 term. Amicus briefs already filed in this case provide compelling reasons why the imposition of a wealth tax would be a very bad idea.
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■ Bill Hoagland has practiced law in Alton for more than 50 years, but he has spent more than 70 years hunting, fishing and generally being in the great outdoors. His wife, Annie, shares his love of the outdoor life. Much of their spare time is spent on their farm in Calhoun County. Bill can be reached at [email protected].